VAT – does a partial exemption special method transfer with the sale of a business?

Businesses which make exempt and taxable supplies must determine what part of their input tax can be claimed.

In order to achieve the fairest VAT outcome, a special method for this partial exemption calculation can be agreed with HMRC, though this often involves a considerable amount of negotiation and significant time in reviewing the way costs are used in making supplies.  Given the work involved it is often desirable for the business to retain its special method when the business is transferred, but is the special method transferred with the transfer of a business?

This issue was considered in the case of Dynamic People Ltd v Revenue and Customs Commissioners ([2016] UKFTT 229 (TC), published on 14 April 2016).  The taxable business in the recent case, Dynamic People Ltd, had previously agreed a partial exemption special method with HMRC and was subsequently transferred to a VAT group.

The First-tier Tribunal decided that this special method had not been withdrawn and was still in effect even after the business had been transferred to the VAT group.

The decision is short, but the implications must be considered by businesses with special methods agreed with HMRC.  Businesses transferred from one party to another should consider whether and how it is required to apply the special method after transfer and how the annual adjustment is impacted.  Businesses transferred into VAT groups should consider the same; and businesses transferred out of VAT groups should consider whether they are still required to apply the special method operated by the VAT group from which it has exited.  In some cases, the retention of a particular special partial exemption method may place the business at a disadvantage resulting in less input tax recovery; a move to a more beneficial method should be considered.

For further information and help on VAT and partial exemption, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.